Tesla

Elon Musk’s Master Plan Hits a Speed Bump

Tesla boosters and critics have clashed for years over whether Elon Musk’s electric-vehicle company is a sustainable business on its own, or whether it requires subsidies to survive. As anticipation builds over the release of the Model 3—Tesla’s most affordable vehicle yet, which will sell for $35,000 in the U.S. and is nearly ready for customers—questions remain about whether Tesla can enter a new phase as a mass-market car manufacturer without the government support and tax subsidies that helped it get off the ground in its early years.

Some bad news out of China offers a cautionary tale. After authorities in Hong Kong got rid of a tax exemption for electric cars in April, sales of Tesla vehicles came to a screeching halt, according to a new analysis from the Wall Street Journal, falling from 2,939 registrations of Tesla vehicles in March to zero in April. The new tax break in Hong Kong, which Musk has called a “beacon city” for electric cars and is considered one of the world’s most promising markets for electric-car manufacturers, capped the tax waiver below the typical cost of a Tesla. The change in price in Hong Kong effectively doubled the price of a Tesla; now, a Tesla Model S in Hong Kong costs $130,000—a far cry from its cost of below $75,000 with the previous tax breaks.

Price differences before and after subsidies aren’t as extreme in other parts of the world, but changes in government policy still remain a major source of risk for Tesla and its investors. In the United States, Tesla customers are eligible for a $7,500 federal income-tax credit, along with state-by-state incentives. Norway's highly subsidized electric-vehicle program has led to rapid adoption in the country, which has a goal of phasing out all fossil-fuel powered cars by 2025. Germany has its own purchase incentive program for electric cars, which isn’t applicable to the Tesla Model S, given its high price point, but will likely apply to the Model 3.

In security filings, Tesla has told investors that changes to such programs “could have some impact on demand for our products and services.” When Denmark announced it would phase out tax breaks for electric vehicles, Musk himself warned that Tesla sales would take a hit.

“Tesla welcomes government policies that support our mission and make it easier for more people to buy electric vehicles; however, our business does not rely on it,” Tesla told the Wall Street Journal. “At the end of the day, when people love something, they buy it.” Tesla said the slowdown in Hong Kong was “expected.” The current tax rules are in effect until March, 2018, though Hong Kong’s government is expected to review the decision before then.

Musk’s troubles in China highlights the obstacles that remain as Tesla transitions from a start-up that was once reliant on a major boost from the Obama administration—including a $465 million loan from the Department of Energy and green-energy subsidies in the wake of the 2008 financial crash—to a major automobile manufacturer. Investor confidence in Musk’s global ambitions have driven Tesla’s market cap to an eye-watering $52 billion valuation—dwarfing several traditional automakers, like Ford—even as the company struggles to increase production to promised levels. Tesla hopes to put those concerns to rest once the Model 3 starts shipping this year. But with Tesla pricing more dependent on politics than most car manufacturers, tax and subsidy policy remains a major risk. Musk is forging ahead regardless, hoping that demand and excitement for the Model 3 will allow him to slingshot past any lingering questions about Tesla’s business model, and finally prove Tesla’s critics wrong.